Again in 2009, silver has waltzed from its lows to create returns considerably higher than gold in the same time period.  However, why should one precious metal outperform another?

Rarity

Although it is not revealed by the price, physical silver is actually as rare as gold thanks to the amount that is melted, smelted, and mixed each year for a variety of consumer applications. 

One of the biggest uses of silver until the recent digital age was photograph development, which consumed millions of silver ounces each year that can never be reclaimed.  The photographic predecessor that used so much silver is being replaced by the digital camera, which includes many silver components.

Volatility

Due to the fact that most silver produced each year finds its way to a factory, the amount of silver that arrives on the retail market is only a small percentage of the total actually produced. 

With such small amounts of the metal circulating, silver is prone to volatile swings that occur with even the smallest shift in demand.  Although the volatility is short-lived, silver can move twice as much as gold in a single day, and the shiny metal is most likely to explode in price with any institutional activity. 

The Affordable Gold

As gold heads for a record $1200 per ounce, investors are likely to experience sticker shock.  Silver, on the other hand, is still affordable, and the investor can take delivery of 60 ounces of silver before owning even one ounce of gold. 

Although retail investors can buy grams and half ounces of gold, the practicality of the purchase comes into question.  Single grams of gold are not only tiny, but also quite expensive, often costing as much as 15-20% over spot.  In contrast, silver ounces, which cost less than gold grams, often trade with a much lower premium. 

Economics 101 also tells us that the more people who can afford a product with a fixed supply, the more costly it will become.  This is evidenced by the uptick in stock prices after a stock split or even the difference between one candy bar and a wholesale pack of candy.

Room to Run

Today's silver price is significantly below the historical 1980 high in silver prices and well behind the historical gold to silver ratio.  Silver has a 200% increase in price before it reaches a new high, while gold has already reached its non-inflation adjusted high. 

Adjusting for inflation, silver could run as high as $60-70 per ounce before striking a new high in real dollar terms.  Although both precious metals show excellent investment opportunities, silver is certainly best positioned for double-digit growth.

The Investment of a Lifetime

Silver is rare, inexpensive, a protection against inflation, and poised for one of the best bull runs in history.  With all the variables coming together to form a perfect play, owning physical silver coins is the best way to grab onto the explosion in popularity – and profitability – of precious metals investing.

Dr. Jeffrey Lewis